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MISHKIN v. AGELOFF
220 B.R. 784 (1998)
Edward B. MISHKIN, as SIPA Trustee for the Liquidation of the Business of Alder, Coleman Clearing Corp., Plaintiff/Appellee,
v.
Roy AGELOFF, Robert F. Catoggio, Lowell Schatzer, Ronan Garber, Joseph Dibella, John Lembo, Mark A. Mancino, Joseph Scarfone, Chris Wolf, Randy M. Ashenfarb, Earl Rusnak, and Danny Garber, Defendants/Appellants,
Edward B. MISHKIN, as SIPA Trustee for the Liquidation of the Business of Alder, Coleman Clearing Corp., Plaintiff,
v.
Philip GURIAN, Tally Group, S.A., Rocena Company, Ltd., Ubiquity Holdings, Ltd., a/k/a Umbiquity Holdings, S.A., Maraval and Associates, Caspian Consulting, Ltd., and Bauman Ltd., Defendants.
Edward B. MISHKIN, as SIPA Trustee for the Liquidation of the Business of Alder, Coleman Clearing Corp., Plaintiff,
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, Defendant.
Nos. 97 Civ. 2690(LAP), 97 Civ. 4639(LAP), 97 Civ. 3817(LAP), 97 Civ. 4645(LAP), 97 Civ. 5201(LAP), 97 Civ. 3627(LAP), 97 Civ. 4640(LAP).
United States District Court, S.D. New York.
March 31, 1998.
Thomas J. Maloney, Cleary, Gottlieb, Steen & Hamilton, New York City, for Edwin B. Mishkin.
Andrew B. Schultz, Great Neck, NY, for Ronan Garber.
Paul F. Condzal, New York City, for John Lembo and Chris Wolf.
David J. Aronstam, New York City, for Mark A. Mancino.
Richard S. Gravante, Gravante, Gravante & Looby, Brooklyn, NY, for Randy M. Ashenfarb.
Michael P. Gilmore, Wexler & Burkhart, Mitchell Field, NY, for Earl Rusnak.
David Molton, Molton & Meekins, New York City, for Danny Garber.
Dale A. Schreiber, Proskauer, Rose, Goetz & Mendelsohn, L.L.P., New York City, for Roy Ageloff.
PRESKA, District Judge. Pending before me in these matters are one appeal and various motions to withdraw the reference. In the action brought by Edwin B. Mishkin ("the Trustee") against defendant Roy Ageloff ("Ageloff"), et al. ("the Ageloff Proceeding"), Ageloff appeals from a Memorandum Decision, dated August 8, 1997 ("the August 8 Decision"), issued by the Honorable James L. Garrity, Jr. of the United States Bankruptcy Court for the Southern District of New York, granting the Trustee relief from the automatic stay provision of 15 U.S.C. § 78u-4(b)(3)(B), enacted as part of the reform package passed under the Private Securities Litigation Reform Act of 1995 ("the Reform Act"), section 21D(b)(3)(B). In addition, Ageloff, in arguments adopted by some of his codefendants, moves to withdraw the reference in this proceeding. Philip Gurian ("Gurian") and National Union Fire Insurance Company of Pittsburgh ("National Union") also move to withdraw the reference in their respective actions ("the Gurian Proceeding" and "the National Union Proceeding"). For the reasons that follow, both the appeal and the motions to withdraw the reference are granted. BACKGROUNDThese actions all flow from the failure of Adler, Coleman Clearing Corp. ("Adler") in February of 1995. By Order dated February 27, 1995, and pursuant to 15 U.S.C. §§ 78eee(b)(3) & 78eee(b)(4), I appointed the Trustee and remanded this Securities Investor Protection Act ("SIPA") liquidation proceeding to the bankruptcy court. Adler was a clearing firm and a member of the National Association of Securities Dealers, the National Securities Clearing Corporation ("NSCC") and the Securities Investors Protection Corporation ("SIPC"). One of the firms that Adler cleared for was Hanover Sterling & Company ("Hanover"). The Trustee claims that Adler's collapse was caused by Hanover's collapse. The Trustee further claims that Hanover's collapse was caused by a series of unlawful actions committed by the various individuals who are parties to the Ageloff and Gurian Proceedings. See Consolidated Memorandum of Law In Opposition to Defendants' Motions to Withdraw the Reference to the Bankruptcy Court of Three Adversary Proceedings, dated September 25, 1997, at 2 ("Trustee Withdrawal Mem."). Before addressing the specific claims raised in each proceeding, a bit of background information about the relationship between Adler and Hanover is helpful. Hanover did not clear its own trades but rather relied upon Adler to do so. Hanover received buy and sell orders from its own customers and then relayed those orders to Adler. Adler held the cash and securities accounts for each of Hanover's customer accounts. After Adler cleared the trades, Adler sent trade confirmations and account statements directly to Hanover's customers. See Memorandum in Support of Motion of Defendant Roy Ageloff for Withdrawal of the Reference to the Bankruptcy Court, dated August 25, 1997, at 3-4 ("Ageloff Withdrawal Mem."). Hanover underwrote certain initial public offerings and, after the initial offerings, was a market maker in the secondary markets for those issues. The parties refer to these issues as the "House Stocks." A significant portion of Hanover's assets consisted of positions in the House Stocks and, as a result, fluctuations in the value of the House Stocks affected Hanover's liquidity and net capital position.
1. Gurian originally moved to dismiss this complaint. That motion was subsequently withdrawn without prejudice. See Consent Order Withdrawing Motion to Dismiss and Motion For a Stay, and Agreeing To Discovery, dated August 25, 1997; Annexed as Ex. E to the Affirmation of Mitchell A. Lowenthal in Opposition to Appellants' Motion Seeking to Reverse the Bankruptcy Court's Order Permitting Discovery to Proceed, sworn to on September 5, 1997. 2. These articulations of the bankruptcy court's holdings noticeably do not include any indication of the particularized discovery requirement. The absence of that requirement reflects the bankruptcy court's holding and should not be read to indicate that the requirement of particularized discovery does not apply. This is an issue addressed more fully, infra. 3. Effective October 22, 1994, the prior version of section 158(a)(3) was amended to its current form. The prior version of this section did not separately delineate the three sub-headings that the current version separately delineates. Thus, under the prior version, reference to section 158(a) included reference to interlocutory appeals, which is now specifically contained in section 158(a)(3). 4. In In re Bertoli, the court indicated that a district court could grant leave to hear an interlocutory order "for such cause as found by the district court here." 812 F.2d at 139. As the court in In re Williams explained, the overall reasoning of the In re Bertoli court supports adoption of a more flexible approach to interlocutory appeals from bankruptcy court orders than that encompassed by section 1292(b). Nonetheless, the In re Bertoli court's language "by the district court here" links the "cause shown" to the methodology employed by the "district court here[,]" and the district court there employed the section 1292(b) standard. See In re Bertoli, 812 F.2d at 137; see also Official Bondholders Committee v. Chase Manhattan Bank (In re Marvel Entertainment Group),209 B.R. 832, 837 (D.Del. 1997) (noting this fact and adopting the section 1292(b) standard); Michigan Bureau of Workers' Dis. Comp. v. Chateaugay Corp. (In re Chateaugay Corp.),80 B.R. 279, 285 (S.D.N.Y.1987) (citing the district court decision in In re Bertoli for the proposition that adoption of the section 1292(b) standard is appropriate). 5. So that the record is clear, these circumstances are as follows: (1) the unstated, but implicit assumption, that I would entertain Ageloff's appeal; (2) the fact that the issues raised on this appeal are important ones of apparent first impression; and (3) the fact that, as discussed infra, I have also decided to withdraw the reference with respect to these proceedings. I further note that I do not intend this decision to stand for the proposition that adoption of the section 1292(b) criteria is erroneous. Given that section 158(a)(3) leaves the question of whether to grant leave to appeal to the discretion of the district court, it seems to me that there is nothing per se inappropriate about a district court's using the criteria in section 1292(b) to inform that discretion. Rather, I hold that based upon the unique facts of this case, the criteria in section 1292(b) should not be adopted and that leave should be granted. 6. In a corollary to this argument, the Trustee appears to argue that the particularized discovery requirement would require, with respect to each piece of discovery, a "separate motion before the Bankruptcy Court before proceeding." Trustee Appeal Mem. at 22. The answer to this argument reveals a more fundamental flaw in the Trustee's reasoning. The particularized discovery requirement should be addressed in the first instance when a motion for relief from the stay is made. At that time, the allegedly necessary discovery can be addressed and evaluated. Thus, the particularized discovery requirement will not necessarily entail multiple trips back to a court for relief (leaving room, of course, for those instances where subsequent events may require a subsequent motion). The Trustee's argument is based upon his erroneous belief that he should not have to specify this discovery up-front, but rather should be allowed to adopt a wait-and-see approach to the particularized discovery requirement. In other words, the Trustee suggests that multiple motions will be necessary because he can only provide a greater degree of specificity with respect to the necessary discovery as the case progresses. The argument falters on its assumption that this manner of compliance satisfies the particularized discovery requirement. Because the Trustee must articulate the specific discovery necessary to avoid undue prejudice now, not at a later, unspecified date, the particularized discovery requirement will not impose multiple motions on the bankruptcy court each time discovery is sought. Stated more informally, as far as the particularized discovery requirement is concerned, it's now or never. 7. I pause only to address one other small issue to which the Trustee devotes a large portion of his opposition memorandum of law. The Trustee reads some of the statements made in the various moving memoranda of law as indicating that counsel for the movants perceives that the existence of certain claims mandates withdrawal without any inquiry as to the specific nature of the claims. The movants argue that this is a straw man intended to divert my attention away from the case-specific inquiry I am required to make. Regardless, to the extent that any party has suggested that there exists per se rules with respect to mandatory withdrawal, as the discussion supra makes clear, I reject such an argument. The law in this area is quite clear that resolution of these types of withdrawal motions requires case-by-case analysis. 8. Although not inconsistent with this statement, I note that since the parties briefed this issue, one court has granted limited relief from the automatic stay to serve, but not enforce, subpoenas duces tecum upon various third-parties. See In re Grand Casinos, Inc. Sec. Lit.,988 F.Supp. 1270 (D.Minn.1997). 9. In a related manner, I note one other apparent inconsistency between the Trustee's position at oral argument and his current position. At oral argument, the Trustee made the following statements:
We allege that this was a conspiracy, in which each Defendant no only agreed to work with one another, but in which each Defendant in fact affirmatively took acts to perpetrate it. Again, there is a debate in light of Central Bank whether 10(b)(5) conspiracy liability survives that decision. Judge Knapp, in the Towers Financial case, says that it does survive, and facts like ours, in which it's not simply a group of people agreeing with one person perpetrating the acts. But however one comes out on that, we sued them under common law fraud as well, and there is no question that under common law fraud, co-conspirator liability continues. Oral Argument Tr. at 75-76. In Dinsmore v. Squadron, Ellenoff,135 F.3d 837 (2d Cir.1998), decided after this oral argument, the Court of Appeals resolved this "debate" and held that Central Bank bars a cause of action for conspiracy under Rule 10b-5. In a letter to the Court dated February 13, 1998, counsel for the Trustee, in response to a letter from counsel for Ageloff, stated that Dinsmore was irrelevant to this proceeding. The arguments raised by the Trustee in this letter ignore the very claims counsel addressed at oral argument and the very debate to which counsel specifically referred. Frankly, I am troubled by this because it appears that one problem that has permeated this action thus far is a peculiar lack of clarity and consistency with respect to the precise claims that the Trustee raises. See Ageloff Appeal Mem. at 4-5; Trustee Appeal Mem. at 22-23. 10. Indeed, and consistent with this belief, to date, the bankruptcy court has not decided the pending motions to dismiss. 11. Because I consider the factors and circumstances addressed herein to be sufficient to warrant mandatory withdrawal, I do not consider the other arguments raised by Ageloff, or the Trustee's and SIPC's responses to these arguments. 12. This issue is the subject of some debate and a bit of confusion. In the Gurian Proceeding, the Gurian Complaint alleges that the claims are core. See Gurian Complaint at ¶ 14. Yet, in opposing Gurian's motion to withdraw, the Trustee appears to treat the claim as non-core inasmuch as he discusses Gurian's jury trial argument under a point heading addressed to non-core proceedings. See Trustee Withdrawal Mem. at 29-30. In addition, in the argument immediately following this section of the brief, the Trustee argues that the National Union Proceeding is core. See id. at 31-32. This is at least consistent with the allegation in the complaint. See National Union Complaint at ¶ 1. Nonetheless, the case the Trustee places primary reliance upon, Hirsch v. London Steamship Owners' Mutual Life Ins. Assoc. (In re Seatrain Lines, Inc.),198 B.R. 45 (S.D.N.Y.1996), has recently been criticized as a misapplication of Court of Appeals' precedent. See In re Petition of McMahon, No. 97 Civ. 8536(SAS), 1998 WL 61001, at *3 (S.D.N.Y. Feb. 11, 1998). Finally, this same confusion and uncertainty seems to have plagued the Ageloff Proceeding. There, the Trustee specifically alleged that the claims against Ageloff, but not all of his co-defendants, were non-core or "related to" claims. See Ageloff Complaint at ¶ 10. Yet, the August 8 Decision states, without analysis, that these claims are core. See August 8 Decision at 5. Under the circumstances, and given the cursory treatment this issue received in the briefs, I will defer ruling on this issue, to the extent that a further ruling on this issue is even required, to a later time when the issue can be more fully addressed. 13. With respect to both mandatory and discretionary withdrawal, the Trustee suggests that if I decide to withdraw the reference, as in fact I have, I should allow the bankruptcy court to oversee pretrial proceedings and, with respect to the Ageloff Proceeding, issue proposed findings of fact and conclusions of law. See Orion, 4 F.3d at 1101-02 (discussing this procedure with respect to permissive withdrawal); Pension Benefit Guaranty Corp. v. Pan Am Corp. (In re Pan Am Corp.),133 B.R. 700, 703-04 (S.D.N.Y.1991) (discussing this procedure with respect to mandatory withdrawal). The decision whether to do so is discretionary. For the following reasons, I decline to do either and withdraw the reference at this stage in all three proceedings. First, so-called routine discovery in this case has already generated an important and novel issue of first impression, the lift stay appeal. By overseeing all pretrial matters, I will avoid any further argument with respect to this Court's appellate jurisdiction and prevent the type of unnecessary delay, expense and duplication of effort that withdrawal was intended to avoid. Second, although it is difficult at this stage to predict the likelihood that these matters will proceed to trial, especially in light of the pending motions to dismiss, I have found that in complicated cases such as this, oversight of the pretrial proceedings provides me with insight into the precise nature of the claims and the theories upon which they are based. For these same reasons, I further decline to submit the motion to dismiss to the bankruptcy court for proposed findings of fact and conclusions of law. This would only generate another level of briefing and expense since I have little doubt, given the tone of the briefing on the motions before me, that whatever the outcome of such a decision, one side would argue that it was in error.
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